Trust Insider: understanding Witan Pacific’s disappearing discount

I recently mentioned Witan Pacific (WPC) in an article on Martin Currie Pacific, pointing out WPC is now the only pan-Pacific fund (Asia including Japan, Australia and India).

It is also different in that, like its much larger stablemate, Witan, it is run as a multi-manager fund.

As I said a few weeks ago, there is a good case for managing money on a pan-Asian basis, given the increasing interdependence of the region’s economies.

For example, China is Japan’s largest trading partner and Japan is China’s largest source of imports and third largest export destination. Hopefully, this reality will help to keep a lid on intra-regional tensions.

WPC was formerly FC Pacific, which was reconstructed in May 2005 when Witan Investment Services became the executive manager of the trust. Aberdeen Asset Management and Nomura Asset Management were given the job of running the portfolio with the assets split evenly between them.

Net asset value (NAV) per share has more than doubled since then but the fund has shrunk through share buy-backs and a tender.

WPC is a little smaller than it was back in 2005 but with a market cap of £171 million is still a reasonable size.

WPC is benchmarked against the MSCI AC Asia Pacific Free index (in sterling). The fund has not beaten this benchmark in every year since it was reconstructed but, over the period from reconstruction to its year end in January 2015, it has beaten the index by 0.8% per annum.

The difficult years were 2013, when it was underweight Japan at a time when that market was doing well; 2006, for exactly the same reason (though the problem was confined to Aberdeen’s portion of the portfolio); and in 2009, when Nomura struggled.

Nomura’s performance continued to disappoint and in April 2012 it was replaced by two new managers, Matthews International Capital Management and MW GaveKal Asia. Matthews was handed 35% of the portfolio and GaveKal 10%.

Since then Matthews’ proportion has been increased at the expense of Aberdeen’s to give them around 45% each. Most readers will be aware of Aberdeen’s management style and I talked about it in the recent article on Aberdeen Japan.

Matthews is managing WPC’s money in accordance with its ‘Asia Dividend strategy’, which looks for dividend-paying companies it believes have sustainable long-term growth prospects. It does not discriminate by size so portfolios can have reasonable exposure (relative to the benchmark) to small and mid cap stocks.

The GaveKal money is invested through its GaveKal Asian Opportunities Ucits fund. This is invested between equities, bonds and cash pools with the idea of benefiting from changes to the macroeconomic environment in Asia. Where they do hold equities, they focus on growth stocks.

All three managers are stock pickers and are unafraid to deviate substantially from the benchmark index. The net effect of this at the moment is that the company tends to be underweight or have no investment in some of the region’s largest stocks but is overweight in medium and smaller sized companies.

With three managers, the portfolio is reasonably well diversified with over 100 holdings.

The two largest holdings are the GaveKal fund and Aberdeen’s Indian equity fund and the top 10 equity positions at the end of May accounted for less than 20% of the portfolio. The portfolio is still materially underweight Japan relative to its benchmark.

Matthew’s portfolio should throw off decent income but the overall focus of the trust is on growing investors’ capital. The fund yields about 1.7%. It tries to grow its dividends each year but was forced in the last accounting year to dip into revenue reserves to pay an uncovered dividend.

Matthews blamed this mainly on the strength of sterling over the period but it is optimistic that the companies in the portfolio are growing earnings fast enough to make up for this in coming years.

One argument often levied against multi-manager funds is the layering of fees. WPC manages to pay institutional rates for its investment management, however.

Aberdeen has the chance of earning performance fees on its portion of the portfolio but has a lower base fee than Matthews. The board tries to keep the ongoing charges ratio below 1% but did not quite manage this over the year to the end of January as the fund shrank through buy-backs. The ratio came out as 1.06%.

Without a high yield to attract investors, the fund is reliant on delivering decent performance.The poor year in 2013 has taken its toll on medium-term performance and unfortunately the fund is lagging the benchmark in its current accounting year (I suspect for the same old reason – the underweight to Japan).

Over the longer term, however, performance is not too bad. The managers have done a good job of driving the discount down over the past few months.It would be nice to see performance pick up and this discount narrowing sustained.

James Carthew is a director at Marten Co

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Monday, June 29th, 2015 EN

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